When Gbenga Asilole thinks about the American job market, several things keep him up at night. They are slowing demand for entry-level talent, tariff confusion, and high interest rates.
ChatGPT is not one of them.
“There will come a time when AI is just part of everything we do, but we’re not there yet,” said Asilole, chief economist at the left-wing Center for Budget and Policy Priorities, adding that “the economy is paralyzed.”
The labor market is showing clear signs of weakness. The long-term unemployment rate is on the rise, and the percentage of Americans looking for work these days has exceeded the number of available roles. Amid constant headlines about layoffs, the unemployment rate rose to a higher-than-expected 4.6% last month. Young people are struggling to stay, older workers are hesitant to retire, and the middle rung of the career ladder is collapsing as many companies “flatten out.” Only health care and construction showed significant growth. This has been called the white-collar recession, and it’s an unwelcome awakening for Americans who expected a college degree to lead to long-term security and a comfortable paycheck.
Given the timing, it’s easy to demonize artificial intelligence. Industry executives say they are “fully committed to AI,” often to the dismay of rank-and-file employees. This technology is rapidly changing how workers are evaluated on the job and how companies define productivity. It’s even shaking up the hiring process. My colleagues spoke with job seekers who submitted hundreds of resumes but were unable to land a position while HR departments were overwhelmed with AI-assisted applications. Economists and investors can’t agree on whether chatbots are the future of the workforce or a much-inflated bubble.
But AI has become a scapegoat for something else, shouldering the blame for the woes of the U.S. job market. In other words, the economy itself is deteriorating. Years of rising interest rates and stubborn inflation, along with slowing wage growth and restrictive trade policies, have created an environment where companies are cutting budgets and the middle class is living paycheck to paycheck.
If you’re frustrated because you got a lower-than-expected raise or can’t find a new job, don’t blame the robots. Blame it on Jerome Powell.
There is no better example of the fear that AI will disrupt the job market than the so-called “world’s scariest graph.” The graph appeared in X and Bluesky posts, news reports, and a thick Substack newsletter. A simple two-line graph tracks two pieces of data: the S&P 500 and the number of U.S. job openings since 2015. The two have stayed pretty much together for the first few years, but there is a decisive break in 2022, when the stock market continues to soar and the number of job openings begins to decline. AI doomers are quick to point out that the date these two lines diverge corresponds to the public availability of OpenAI’s ChatGPT. That means a massive language model explosion instantly began displacing thousands of jobs while simultaneously pumping money into Wall Street.
The need to hire human workers is expected to decrease as chatbots and AI tools increase employee productivity, drafting emails, writing code, and streamlining administrative tasks, increasing profits for employers. There is plenty of anecdotal evidence from well-known companies to support this idea. Nvidia wants its employees to use AI for “every possible task,” Microsoft is “rethinking” its business model for the AI era, Big Law hopes AI will make its services faster and cheaper, and top banks and consulting firms are shifting some tasks from humans to bots.
But is AI already replacing many jobs? Probably not.
Ajiroa believes the white-collar downturn caused by AI is “overblown.” He said many companies “use AI as a cheat code rather than an efficiency booster,” and that “using a cheat code actually forces you to make a mistake or cut corners.” He believes both chatbots and American companies’ technology strategies have a long way to go before AI truly disrupts the workforce.
Even Federal Reserve Chairman Jerome Powell, the world’s most powerful economic policymaker, is not convinced about the impact AI will have on the current job market. When asked about technology at the Fed’s December meeting, Powell said AI is “part of the story, but not a big part of the story yet.”
Also, “The Scariest Chart in the World” lacks important context. That’s the federal funds rate. The federal funds rate, determined eight times a year by Mr. Powell and his colleagues on the all-important (and unassumingly named) Federal Open Market Committee, is the key interest rate that underpins all types of lending. For banks and businesses, this number determines how easily and cheaply they can borrow money. For consumers, Fed rates affect everything from home prices to car loan and credit card interest rates.
Low interest rates allow businesses to access debt more affordably, which helps foster growth and employment. But when the federal funds rate rises, so does the price of borrowing. While this helps reduce inflation, higher interest rates make it more expensive for businesses to operate, so many businesses are looking to cut costs in other areas, often at the expense of their employees.
It is true that the number of job openings began to diverge from the S&P 500 at the same time ChatGPT was launched, but that was also when interest rates began to rise. From early 2022 to late 2024, federal funds surged more than 5 percentage points. This was a restructuring of the financial strategy aimed at curbing soaring prices and cooling an overheated economy, and was a major departure from the policy of nearly a generation ago. The Fed lowered interest rates to zero in 2008 to deal with the effects of the financial crisis, but the benchmark interest rate never rose above 2.4% for the next 12 years. Following emergency measures early in the pandemic, the dramatic rate hike in 2022 marks the official end of the zero interest rate era of the 2010s.
This sudden rise in interest rates was a turning point for many businesses. «I tweaked the wording here because it was similar to the sentence in the graph above Hiring boomed early in the pandemic: Job openings soared to record highs as technology and business sectors competed for new talent. A collection of quotes and insights collected by various regional Fed banks from executives across the country, The Beige Book provides a rare window into the thinking of hiring managers and executives during this time. Beige Book’s 2021 and 2022 labor market commentary tends to talk about “moderate to solid” job growth, strong job demand and worker shortages, with little mention of interest rates. Things changed when the Fed started raising interest rates. “Interest rates and inflation continued to weigh on activity,” a note in Beige Book’s November 2022 edition said, while another note said “labor demand weakened across the board,” pointing to layoffs in tech, finance and real estate. Both blue-collar and white-collar sectors bore the brunt of interest rates that year, citing rising borrowing costs as the main reason for not hiring. Meanwhile, Americans are quitting their jobs as vacancies dry up, and the job market has seen the biggest surge in layoffs since the 2020 government shutdown.
As interest rates rose, American companies began to lean into the rhetoric of “efficiency.” Cutting bureaucracy and red tape and reducing the workforce were touted by executives as a silver bullet for profits in the face of rising financial costs. Leaders from companies like Meta, Amazon, Google and Microsoft have talked about hiring freezes and layoffs as bets on productivity rather than finances.
This trend continues, with the October 2023 Beige Book Note stating that many sectors are “reducing recruitment plans” and “rightsizing” budgets due to rising interest rates. Fast forward to today, and even as Chairman Powell and the Fed slowly move to lower benchmark interest rates, businesses are still grappling with rising funding costs. In October’s Beige Book, companies large and small talked more about layoffs and job cuts than new hires. Beige Book reports over the past year suggest that while AI is contributing to softening hiring in certain sectors, such as call centers and accounting firms, it is not contributing to widespread job losses. Instead, the two words that companies like Tesla, JPMorgan, and Whirlpool mentioned most frequently on their earnings calls were “uncertainty” and “tariffs.”
However, it is less appealing to say that the need for redundancies is the result of long-term changes in funding costs. It’s worth pointing out that AI is both an excuse for layoffs and a way to give investors hope for the future. Chen Zhao, head of economic research at real estate firm Redfin, said many companies are struggling to balance profits with high borrowing costs. This is especially true because the housing sector is sensitive to the federal funds rate, he said. He said sectors such as technology were similarly vulnerable.
“I think what’s going on right now is simple economics,” she said, adding, “But saying we’re going to cut jobs, or say we’re not going to cut jobs very much, doesn’t look very good to investors. It sounds a lot better to say we’re getting a lot more productivity because of AI.”
Although recent technological developments such as computers, cell phones, and the Internet have each reshaped the job market and workplace, people tend to underestimate their schedules. Economists say it will be years, perhaps decades, before there is concrete evidence that AI is replacing jobs on a large scale. And AI may create thousands of jobs while making others obsolete.
“The overall evolution of technology will be much slower than optimists and pessimists think,” said Scott Linthicome, vice president for economics and trade at the right-wing Cato Institute. While AI is developing rapidly and can perform basic tasks, it is still a long way from replacing human judgment, creativity, and decision-making. “There will certainly be disruption, and that is inevitable.” “But it won’t be a disaster.”
The job market is in a rut, but chatbots aren’t the only or even the main culprit.
Despite weak job market numbers, the U.S. Federal Reserve has cut interest rates three times this year, a cautious policy stance driven by economic instability. A recent Fed report shows that trade policy and inflation have prevented Mr. Powell and his colleagues from cutting interest rates at a faster pace, even as the employment outlook worsens. This has also caused divisions within the central bank itself, with the December meeting having the highest number of members who disagreed with the rates committee’s final decision since 2019. Economic forecasts also show that the median member expects one interest rate cut in 2026, which is lower than expected at this time last year. The move suggests that the economic situation is not catastrophic unless Mr. Powell plays his cards carefully.
While the rate-cutting pattern may begin to provide relief to borrowers, the economy will take time to recover and severe headwinds remain. Rapidly changing tariffs are exacerbating the effects of high interest rates, making many companies reluctant to invest or spend money. “Tariff uncertainty is a real drag on the job market, as businesses are saddled with millions, if not billions, of dollars in additional tax and tariff costs,” Linthicome said.
Reduced immigration due to President Trump’s deportation policies is also part of the equation, with fewer immigrants entering the workforce contributing to lower labor force participation rates. Mr. Asiloa also said that DOGE’s radical cost-cutting strategy for federal employees has spurred an “efficiency” movement in the corporate world. All of this adds up to very legitimate job insecurity for workers.
Economists expect the market to grow and adapt with new technology. And the AI takeover predictions are far less dire than most people think. There may be a chatbot revolution someday. But for better or worse, the real star is the federal funds rate.
Allie Kelly is a reporter on Business Insider’s economics team. She writes about social safety nets and how policies affect people.
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